A gauge of U.S. manufacturing from the Institute for Supply Management showed the sector contracted in August, its first decline since 2016.

The ISM U.S. manufacturing Purchasing Managers' Index fell to 49.1% in August, the lowest reading in more than three years. Any reading below 50% signals a contraction.

The report raised fears of a recession and hit the stock market. The Dow Jones Industrial Average lost more than 300 points, extending losses following the morning release from ISM.

"Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement.

The escalated trade war with China is taking a significant bite from the manufacturing sector, which for a time was considered one of the big winners under the Trump administration, notching big gains in employment and activity. But that has now appeared to be nullified by the trade war.

Tariffs on $112 billion of Chinese goods took effect Sunday, which target many everyday household items.

"The breadth of the weakness is troubling and tells us the economy needs some extra help from the Fed," Joseph Lavorgna, chief economist at Natixis, said in a note. "If monetary policymakers do not deliver, risks to the economic outlook will mount."

The August contraction ended a 35-month expansion period where the PMI averaged 56.5%, according to ISM. Production and employment gauges also showed contraction in August for the first time after growth for almost three years, ISM data showed.

ISM's new export orders slowed for the second month in a row to their lowest reading since April 2009.

"Many respondents continued to note global trade softness as a reason for sluggish activity," Fiore said of slowing new export orders.

Data from IHS Markit also released Monday showed the U.S. manufacturing PMI slowed to 50.3 in August, its lowest level since September 2009. The gauge signaled a slight expansion however.

"The August PMI indicates that US manufacturers are enduring a torrid summer," Chris Williamson, chief business economist at IHS Markit, said in a statement. "Output and order book indices are both among the lowest seen for a decade, indicating that manufacturing is likely to have again acted as a significant drag on the economy in the third quarter, dampening GDP growth."